Business Owners and Buyers Beware!

Your Lease Deal May Limit Your Ability to Sell Your Business

In most leases the tenant has the right to assign the lease with the landlord's consent.  The landlord may impose conditions for its consent.  It is common for one of these conditions to be that the parties show the landlord that the proposed new tenant is respectable and financially sound with experience in and a good reputation for conducting the business permitted under the Lease or words to a similar effect.

Usually landlords would have a look at the proposed new tenant's business experience. If the proposed new tenant puts up the necessary bank guarantee/directors' guarantee, has some relevant experience and the previous tenant is not released from the lease obligations, landlords would usually consent to the lease assignment.

A recent NSW Supreme Court decision supported a landlord's decision to twice refuse to  consent to its tenant's requests to assign the lease.  This in turn stifled attempts by the current tenant's ability to sell the business.  The case can be viewed as a warning to tenants in Queensland to review current assignment of lease clauses.

In this case, the tenant owned a large restaurant in Manly (Harbourside Catering Pty Ltd v TMG Developments Pty Ltd [2007] NSWSC 1375).  With 18 months (and 2 three year options) left to run on the lease the tenant attempted to sell its business.  The shareholders of the purchaser company had considerable business experience but no experience in managing or operating a restaurant business.  The landlord refused its consent to the assignment of the lease on that basis.

The lease was a retail shop lease under the NSW legislation.  Although the Queensland Retail Shop Leases Act 1994 does not yet contain a similar provision negotiations should consider the consequences of any assignment to avoid a dispute in the future. 

In this case the tenant attempted to sell the business again a year later.  This time the shareholders of the purchaser company had substantial assets but only one of the shareholders had experience with restaurants and this was limited experience.  The landlord again refused to consent to the assignment on the basis that the experience and retailing skills of the shareholders of the purchaser (proposed new tenant) where less than that of the current tenant.

The NSW Supreme Court held that the landlord was legally justified to withhold its consent on both occasions on the basis that each purchaser's retailing skills were inferior to those of the tenant.  The Court concluded that there was no requirement for the businesses of the tenant and purchaser to be identical but they should be sufficiently similar to permit ready comparison of the retailing skills involved.

While as yet there is no similar legislative requirement in Queensland retail leases for prospective purchasers to have at least the same financial resources or retailing skills of the current tenant, this case is a timely reminder that if the landlord wanted, it can refuse to consent to a request to assign the lease.   Business owners and buyers should consider  this when negotiating leases as a clause of this nature could limit their ability to sell their business during the term of the lease.

For further information contact
Serena Paramananthan
T (07) 3292 9705
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